Yahoo Inc.'s decision Monday to slash 10 per cent of its roughly 14,000 to 15,200 global workforce underscores the drastic descent of the worldwide online display ads market, according to one industry analyst.
Staggering from the combined effects of a failed takeover bid by Microsoft Corp., a slowing economy and the failure to meet earnings expectations, Yahoo Inc. said the job cuts will help it cut its annual cost run rate, most of which is "headcount-related," according to the company.
Employees who will lose their jobs will begin receiving notices within the next few weeks. The company did not specify what positions will be affected and there is no word yet on how this will impact Yahoo's Canadian operations.
Although the Internet pioneer exceeded analyst revenue projections, slowing demand for online advertising resulted in disappointing third-quarter earnings, according to the company's chief financial officer.
"An increasingly challenging economic climate and softening advertising demand contribute to revenues this quarter coming in at the low end of our outlook range," said Blake Jorgensen, CFO of Yahoo, in a statement released following the firm's 3Q 2008 financial report late Tuesday afternoon.
The statement also said Yahoo's goal is to reduce its current cost run rate of approximately $3.9 billion by more than $400 million before the end of the year. To achieve this, the company will take both "headcount and non-headcount" related cost-cutting actions.
But because the majority of its expenses are workforce-related, "Yahoo expects to reduce its global workforce by at least 10 per cent during the fourth quarter of 2008."
Yahoo's revenues for the period ending Sept. 30, 2008 was $1.8 billion, a one per cent increase over the same quarter last year. Net income was $54 million or four cents per diluted share, down from $151 million or 11 cents in the same quarter of 2007. Financial analysts had earlier expected earnings of 9 cents per share or $1.37 billion.
Wall Street is actually not worried about Yahoo's 3Q performance but rather what comes after that, according to a New York-based tech industry analyst.
"People are not really concerned about the third quarter, they're worried about 2009," said Colin Gillis, senior technology analyst for financial services firm Canaccord Adams Capital Inc.
Although Microsoft's failed bid to takeover the company caused Yahoo's shares to tumble, this episode is "over" and has little bearing on the search firm's current woes, he said.
Gillis says the market for online display ads – Yahoo's bailiwick – is tumbling fast due to tightening advertising budgets.
"Yahoo's decision to cut its workforce highlights the trend towards tighter marketing budgets, less display ads and emphasis on performance-based advertising."
He said in December of 2007, Yahoo's global display ad revenue amounted to about $518 million or approximately 20 per cent of its total earnings. The figure dropped to just $435 million or three per cent of total earnings in September this year.
By contrast, revenues from Yahoo's search operations went up. In December of 2007 the company posted $392 million in global search revenues. By September of this year that figure went up to $438 million.
"This is actually the first time that Yahoo's search revenues exceeded display ad earnings," said Gillis.
Many advertisers are switching to search ads because they offer a better means of measuring consumer response, the analyst said. The development does not bode well for Yahoo.
"Yahoo leads the market for display ads, but it still trails Google in search advertising." Google Inc. controls 60 per cent of online search queries compared to Yahoo's 20 per cent.
Still, Yahoo's founder remained optimistic.
"We have been disciplined about balancing investments with cost management all year," said Jerry Yang, chief executive officer and co-founder of Yahoo. "We enter this slowing market with competitive advantages as the destination of choice for consumers and as a leader in providing online advertisers with the broadest set of advertising management tools and products in the industry."
While Yahoo intends to layoff about 1,400 employees this year, Gillis said, it hired more than 1,500 workers from "low-cost parts of the world" during the last three quarters of 2008.
The new round of layoffs will likely affect sales and marketing as well as general administration departments of the company. Key engineering positions will likely be safe, Gillis said.